Implementing an effective risk management policy could be a crucial investment in promoting the success of a company.
Risk management is not designed to totally eliminate risk from operations, but to mitigate it. Good risk management allows for calculated risk-taking, where
appropriate.
Planning for calculated risk is essential for company directors, whose key duties are to grow the business and increase profit – as well as to act in a way that best
promotes the success of the company for the benefit of its shareholders.
A thorough understanding of a business’s position in the market – and its exposure to risk – is vital for day-to-day management and for future strategic planning.
Good risk management policies provide for the monitoring of risk. This helps businesses identify the development of risks, and consequently supports decision-making.
Threats and opportunities
A risk profile is highly individual to each business. It should cover matters relating to both the commercial operations (the business carried on by the company) and corporate functionality (the structure and stability of the company itself).
Commercial risk considerations may include:
- Raw material prices
- Reliability of the business’s current customer base
- Pipeline of future sales
- Relationships with suppliers
- Potential disruptions to distributors
- Availability of employees with the appropriate skillsets
- Any potential disputes arising from the trading history of the business.
Businesses trading internationally may be particularly focussed on potential changes to export controls, tariffs and competition regulation.
With regard to corporate matters, the risk profile may include:
- The company’s financial position (such as credit, liquidity and cashflow risk)
- Ownership of shares in the company and the nature of any current or prospective investment
- The company’s banking arrangements and any consequential charges over assets
- The stability and appropriateness of the premises used by the company.
There’s no standard risk register for manufacturing companies. Each business should carefully consider the factors that may impact on their future operations.
The main risk for any company is that it will become insolvent. While the key red flags for impending insolvency are financial, maintaining a risk register may highlight potential problems before they become irreparable.
Critical problems may be identified immediately, such as matters relating to health and safety compliance. An accident, and subsequent health and safety investigation, could severely disrupt the operation of the business. While accidents can’t always be avoided, the likelihood and severity of potential accidents can be mitigated with appropriate planning.
For example, reviewing relevant product safety regulations can allow required alterations to be made to product designs before incurring production costs. Including the matter on a risk register may prompt the business to review the position on a regular basis, and avoid being caught out by regulatory changes.
Risk registers are also designed to address “creeping” risks, such as:
- Failure of succession planning
- Cyber vulnerability
- Long-term capital maintenance.
Where “creeping” risks are addressed early, their impact can be significantly reduced. For example, cybersecurity systems may be appropriate at the time of their implementation, but might become inadequate over time, due to software development and new threats.
Managing risk effectively
Directors owe a statutory duty to exercise reasonable care, skill and diligence in carrying out their functions within a company. Effectively managing risk will help directors to fulfil these duties.
In the event that the company does face difficulties, implementing an effective risk management policy will help directors to demonstrate that they’ve seriously considered the management of risk. In turn, this will help to mitigate individual responsibility for the company’s shortcomings.
Ultimately, an effective risk management policy should assist a company in achieving its objectives. More importantly, it should allow directors to continue developing the business, without spending excessive time on risk analysis or managing problems that could have been avoided.
We’re specialists in helping manufacturers manage their risks – get in touch today to find out about the expert advice we can offer.
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